All Forum Posts by: Paul Allen

Hi,

SMLLC to flip homes. 

Say I make 30K in gains during a year flipping homes. 

You don't make $30K in *gains* flipping homes, you make $30K of income that will be taxed at ordinary income tax rates. (I know it seems like it should be 'gains', but it isn't. When you are flipping homes, the homes are inventory. The income from selling inventory at a profit is taxed at ordinary rates.)

1. I decide to take 15K as my annual pay. Can I take the Pay at end of the year when I'm filing my taxes OR do I have to pay quarterly estimated payments (SE Taxes). Again, until about the end of year I will not know how much profit I will make to decide my Pay. 

What you 'decide' to take as 'pay' is inconsequential under the tax code. You earned $30K, so you will be taxed on $30K. If you have not made quarterly payments to cover your tax bill on $30K, you may owe an additional penalty. You can copy and paste this same answer for your question 2. The income is taxed whenever it is earned, and is not dependent on whether you move it between your business and personal bank accounts.

• Taxes have NOT been taken into account, but I think you all know that real estate beats the stock market hands down in this category.

I am not sure how you came to the conclusion that real estate gets favorable tax treatment as compared to equity investing.  Holding SPY for the time period indicated would have resulted in qualified dividends and/or capital gains; all taxed at the long term capital gains rate. (Assuming a tax-qualified account was not used. If it was, there could have been tax deductions for the contributions, tax-deferred growth, and/or zero taxes on the back end.)

If you're renting, real estate generates rents (ordinary tax rates), unrecaptured section 1250 gains (up to 25%), and capital gains.  If you're flipping, real estate generates ordinary income, self-employment taxes, and taxes on S-corp profits. You could conceivably run this level of real estate investing through a tax-qualified account, but it is less likely (and at the least, self-directed accounts that allow you to invest in RE add costs and complexity). 

Taxes on real estate investing are generally better than taxes on wages, but I am not seeing real estate investing getting preferential tax treatment over equity investing. You may get the QBI deduction, but I don't think that will close the tax gap. (Although, I have not run the numbers...)

Part 2:

You have compared a very active investment to a very passive investment. (Stating an observation, not criticizing your method.) It might be interesting (or, I should say - I would be interested) to compare passive RE investing to passive equity investing, and active vs active.  

Good stuff. 

Best of Luck with Your Real Estate Investing!  

 I DO want to leave as much as I can to MY charities and heirs and not the Govt.

For the majority of landlords, it will change absolutely nothing, as they show losses after depreciation.